Already Bought A 3D LCD In Anticipation Of QE "Instarefi" 1.999? You May Want To Consider A Refund

Tyler Durden's picture

Earlier today we noted that the biggest buzz on Wall Street is the recent suggestion by MS and ML's Harley Bassman that the GSEs should provide some form of autorefi program to take borrowers to market rates. As this would impact a vast majority of the 37 million of mortgages outstanding backed by the government, not only would this housing stimulus have a huge impact on consumption appetites, but it would be a political coup as all of a sudden the administration would find tens of millions of giddy homeowners who are paying far less monthly, and quite satisfied with the way Obama has handled things. It is thus likely that this program will take off shortly (if at all) just before the mid-term elections to neutralize all the pent up discontent focused on the administration. Yet there may be less than meets the eye. As Market News points out, over the past 24 hours Wall Street has gone into overdrive analzying the consequences, both positive and negative, of such a move. Below are the conclusions.

First, here is how the pricing action in various MBS tranches occurred:

Premium MBS bonds went down in price because this refi concept stoked speculation that primary mortgages with higher rates will get paid off soon and the higher coupon MBS that backed those mortgages would be called back. This paper would be replaced with lower coupon MBS that would then be backing primary mortgages at lower rates.

And here is the prevailing Wall Street sentiment on what seems quite certain to become the Treasury's latest stimulus:

Many mortgage analysts said the concept sounded good but there would be many hurdles to cross before this could get done.

Still, mortgage strategists at Credit Suisse said the idea is "appealing in principal" but there are many barriers. Some of these are:

1) Program would have to be structured as a refinance not a modification because the former costs investors and the latter costs Fannie, Freddie and Ginnie;

2) Eligibility decisions would have to be simple to execute "en masse" and in some cases government might be "over-subsidizing;"

3) In order to use the current system, the housing agencies would have to "indemnify" lenders against put backs;

4) Refi costs would have to be rolled to get around borrower cash constraints;

5) Might have to be origination fees and loan level pricing adjustments (LLPAs) would have to be dropped, reduced or rolled in;

6) Agencies might end up charging higher guarantee fees to compensate for higher Loan-to-Value or LTV;

7) Assuming all borrowers with 6% or higher mortgage and current LTV>80% from '05-08 are refied might create $750 billion in lower coupons and Fed's balance sheet might have to called upon again, with likely opposition in Washington;

8) MBS market would be disrupted again as tradeable float taken from market;

9) It could take 6-9 months to process the loans. They estimate $10-15 billion in incremental annual savings for homeowners, much less than other estimates in Street.

Citigroup mortgage strategists said the chance of this program coming to fruition was "remote" and highlighted the costs.

Citi says a program that would refinance all GSE loans with a 5.75% or higher coupon into a 4.50% coupon could provide about $30 billion in stimulus from consumers.

But It would also cause a $30 billion premium loss to the GSEs retained portfolio, raise Treasury borrowing costs by $5-10 billion ayear as yields rose, and mortgage rates might rise by 100 bps.

Citi says the rise in mortgage rates would be due to higher Treasury yields, higher negative convexity, higher implied volatility and massive gross issuance which would be a significant short-term problem.

The "free lunch" refi programs that some are advocating "are actually very expensive and would result in more indigestion than thegovernment can stand," the Citi said in a research report.

They also reminded that 90% of the loans that would be allowed to refinance are not delinquent loans. Delinquent loans are getting betterand more appropriate help from other government programs.

Mortgage strategists at Nomura Securities said the odds of such a plan are only 10% if there is no double dip in the economy. If there isa double dip, the odds rise to about 30%.

If the plan was adopted, most mortgage investors would suffer "meaningful" losses in the short-term.

However, the $1.3 trillion in mortgage securities owned by Treasury and the Federal Reserve would suffer less because their costs are lower, they are not marked to market and any losses would be offset by the interest the government has already received, Nomura said.
But Nomura also pointed out that if such a plan was instituted because of a double dip in the economy, the effect on bond yields and mortgage spreads would likely be reduced.

And the government might convince originators to reduce primary/secondary spreads to more normal levels.

Because of these factors, Nomura thinks primary mortgage rates would only rise to 5.00-5.25% which is still attractive.

Finally, Nomura says mortgage investors might complain about government interference in private affairs, but the government could make a few good arguments of its own.

For example, where would the markets be now if the Treasury and Fed had not bought $1.3 trillion MBS foster lower mortgage rates.

And the government would indeed be helping people who are not delinquent and are still making their mortgage payments at much higher than current market rates.

That might sound like a pretty admirable plan if a double dip ensues.

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IBelieveInMagic's picture

Dammit! I was just making up my Christmas wish list to my Senator and Rep. -- my vote is up for grabs to anyone who can provide monthly 60 gallons of free gas and free electricity.

russki standart's picture

To summarize the above, the criminal banksters, wishing to extend the ponzi, want to ensure that the sheeple will continue to pay interest on their loans. So they need another gimmick to convince the useless eaters to keep paying interest . The banksters, unlike the typical great unwashed, understand that the  loan principal will never be paid back in nearly all cases. The banksters, however, do not care since they lent them FRN´s backed by nothing other than military force and threats. No tangible value was given to the original  borrowers, courtesy of the printing press, so nothing was really lost. Rather, the trick is to keep the suckers paying interest, knowing full well that over the term of most mortgages and loans, far more money will be collected in interest than was ever ficticiously lent out.

bigkahuna's picture

dollar backed by MBS and leveraged real estate


government gains interest in residential real estate mortgages backed by a dollar that will implode = government gets hard assets when dollar implodes by calling in all mortgages.

B9K9's picture

Very good, young grasshopper!

While cumulative interest payments do indeed exceed the phantom value of the original loan, interest itself is nothing but an illusion fueled by the same confetti.

The real prize in this millennia old tale is land: productive capital (facilities) and raw materials (commodities). This is how it works:

Phantom capital is "lent" for very real productive assets. At some point, which can easily be modeled (exponential function), debt loads (interest payments) exceed income serviceability and repossession takes place.

However, there is a rather pleasant ending in most instances. You see, even though the power-elite end up holding all the productive assets through their fraud, eventually they must flee for their lives as the mob chases them off the island, region and/or continent.

Oh where, oh where will they go next?

Rusty Shorts's picture

 - you're right B9K9, its the same all over, the powers that be doing a smash and grab on everything that's worth anything in a bid to separate the ordinary people from their land and resources.


Very interesting video ... about to happen in NorCal at about 3:25;

Pondmaster's picture

Good tube vid Rusty . If as is the case the Gov't is 95% of the mortgage market , ultimately they own most homes ( Like a Snidely Whiplash ) they can pass foreclosure dictums ( ) and take away homes based on religious , political views at whim . Just like they are confiscating public mineral and resource  lands en masse  . Isn't it all just amazing . We have become a socialistic nation and not even seen it happening . Slaves to Gov't ( um er Corporate America)  . The plan is NO PROPERTY AND TANGIBLE ASSET ownership by the people . Slaves all.

Missing_Link's picture

However, there is a rather pleasant ending in most instances. You see, even though the power-elite end up holding all the productive assets through their fraud, eventually they must flee for their lives as the mob chases them off the island, region and/or continent.


Oh where, oh where will they go next?

The moon.

DarkMath's picture

To the Bailout Team at the Treasury

"With mortgages there are a lot of games played because unlike a regular bond that has defined call provisions (if any) a mortgage can prepay at any time, removing it from the pool.  This creates a duration problem for the seller which is accounted for in various ways."

"But what if some of the notes aren't paying?

Well, at first blush, you're dead, because the coupon "inbox" from the mortgagees is short.  But in fact some of them have prepaid - which means that if you're not being honest you could raid the capital "box" and make the interest payments with it. "

Could it be that bad over there at Freddie/Fannie, I mean they wouldn't be hiding any other skeletons would they? Nah, they would never do that....



ZeroPower's picture

That might sound like a pretty admirable plan if a double dip ensues.

That about sums it up folks.

REFIs for everyone!!1

Anonymouse's picture

Of course none of this is necessary in this, the summer of recovery.

I'd be quite put out if I were an MBS investor.  But the Supreme Court has allowed government to abrogate contracts (c.f., Chrysler), so I guess there is nothing anyone can do about.  Rule of law be damned.

bigkahuna's picture

The rule of law is only for us. Justice = just us

jeff montanye's picture

indeed rule of law be damned.  too big to fail.  aig vs. bear stearns vs. lehman brothers. non treasury securities all over the fed balance sheet, far beyond any value ever backed by congress.  war without declaration or attack.  warrantless wire tapping.   imprisonment/torture/rendition/assassination of american citizens by executive order.  

the nation is on a very slippery slope that began to dip a long way back but has reached well beyond double black diamond at present.    

bob_dabolina's picture

Doesn't matter if you drop the interest rate to 0%.

If you can't afford the home, you can't afford the loan.



bonddude's picture

Will they be picking winners like deadbeats and illegal aliens or is this for anyone ?

drwells's picture

This is America. Take one guess.

Geoff-UK's picture

Thank you for the one smile I've had all day...

OldTrooper's picture

The NSA will use their super computers to compare voter registration rolls to mortgage records to determine which borrowers are elligible.

DosZap's picture

Nah, they will get the SS#'s of Dead people in Chicago, and house illegals there.

Just imagine how many illegals you could get into 3500-5000sq ft!!!!

Lapri's picture

Maybe they will use BMI that is to be electronically reported by your doctor to see if you are fit enough for instarefi.

Dr. No's picture

One would have to analyze if getting the refi outweighs the not paying at all.  No doubt a one page refi form would negate any legal rights they may have on the current ill termed loans.  By rolling over, they would loose the right to sue.  For people underwater, what is the difference in interest rate?  The principal is still greater than the asset value.  I would be careful on any refi offers if I was behind or underwater.

BrosMacManus's picture

I'm curious, who would they lose the right to sue, and under what pretense?

Mentaliusanything's picture

And if the refi's came with a new clause saying that the refi is "Full Recourse" ? that of course would be noted in UFP (ultra fine print). Oh how lovely it is to write a new contract. You could stitch the debt slaves pretty good.




Mariposa de Oro's picture

"You could stitch the debt slaves pretty good."


Amen!  This is precisely my concern!  I owe less than 70k, and am several months ahead in payments on my 5.87% fixed rate mortgage.  A rate of 4.5% is tempting, but I don't trust this bunch of crooks one bit.  Its the little guy that always gets in the end (pun intended).  There has to be a catch....

assumptionblindness's picture

<<Full Recourse>>

Bingo!  There has to be a catch...the Chinese want their money back! 

bonddude's picture

I guess you do everyone since the bankos would have gone banko anyway.

traderjoe's picture

We are quickly spiraling into the comical. This plan would further the tearing of the social fabric and bring further pain as the system unwinds under its own weight. 

The Fed is owned by the banks. Therefore, there will not be a plan floated that doesn't benefit them. Further quantitative easing and/or refinancing will simply allow them to dump their bonds at higher prices before their eventual collapse. I also think the refinancing will allow them to attach some recourse (v. non-recourse) to the loans, and also perhaps also clear up all of the mortgage documentation/ownership issues...

Tom Servo's picture

Bingo....getting them all on recourse loans means you're a debt slave for life.  (Insert FEMA camp relocation drivvel upon your eviction from your home). I'm with shitty WFC now, I'm afraid of refi'ing anyway because I don't want my mortgage to get shipped off to "Freddy fucking Mac" (I miss Walstreetpro2) or Fannie.


I think his majesty Obama will save this one to rollout in mid-2012.

carbonmutant's picture

You mean there won't be any impeachment...?

JLee2027's picture

Need 2/3 in the Senate for removal.  Don't see many DINO's there.

VegasBD's picture

Yea good point! Why no more videos from wallstreetpro2 lately?

Rusty Shorts's picture

IMO, he got a visit from the MIB.

FEDbuster's picture

They either paid him off (big $$ to shut up), put him in jail (in Egypt) or killed him (but someone logs into his Youtube channel once and a while).  His real name is Kevin Rowland and he is from North Carolina.  Anyone out there have good internet tracking skills?  Let's find out what happened to him.

A Nanny Moose's picture

Haha! Freddie Fucking Mac!!


Wouldn't that be just Wonder-Goddam-Fuckingful?!

RSDallas's picture

Wait a minute I had to stop after getting to this point:

" In order to use the current system, the housing agencies would have to "indemnify" lenders against put backs;

Doesn't this transfer the entire fucking underwater, non performing mortgage market to the tax payer in one simple swoosh?

Calvin Jones and the 13th Apostle's picture

Doesn't this transfer the entire fucking underwater, non performing mortgage market to the tax payer in one simple form?



Yes!!  That's the whole point, don't you get it!!  The one problem is, HAMP was trying to do pretty much the same and it's a huge failure.

ghostfaceinvestah's picture

That is exactly why the likes of MS (i.e. Saxon) are pushing this idea.

RSDallas's picture

Thing is..this wouldn't solve shit.  I'm guessing, but I would think that most defaults that currently happening are people walking away due to their loan to value.  This does nothing for that.  It does however accomplish step one for the fed and that's getting the banking system off the hook.  Then they just bleed them off for the next 10 years.  There may never be another Morgage originated in the US again if this happens.  I'll have to go from building homes to government bunk houses.

A Nanny Moose's picture

Kicks the can of sovereign bankruptcy, and Mad Max. So that is something, yes?

Cyan Lite's picture

The mortgages are already owned by FNM/FRE/FHA, thus the taxpayers are already on the hook for the underwater non-performing loans.

FEDbuster's picture

Bingo!  This would reduce the chance of more people doing strategic defaults.

SimpleSimon's picture

In other words, f*ck the savers, reward and encourage debt till all are completely enslaved.

Boilermaker's picture

OH figured that out?